More False Hope for Market Timers

Timing the market is a fool's errand, so don't try it

Bill McBride of the blog Calculated Risk is a regular read for me, and I really respect his work — particularly on all things housing. But this post from Sunday was a bit of a downer for me.

Not because it’s incorrect or even because it’s ill-meaning … but because I know it will simply provide more false hope to the doomed market timers out there.

Here’s what Bill did as an intellectual exercise: He calculated how much money you could preserve (or make) by timing the business cycle accurately and waiting until precisely that moment to get into stocks.

The results are admittedly compelling. McBride “assumed an investor started at four different times, in January of 1970, 1980, 1990, and 2000.” And here’s the resulting performance:

His commentary, on the whole, is good and balanced. For instance, McBride notes that:

Unfortunately forecasters have a terrible record of predicting downturns. The running joke is that forecasters have predicted 9 of the last 5 recessions! Although a forecaster doesn’t have to be perfect, they still have to be right. And that is very rare.”

Those are his bold marks for emphasis. And I couldn’t agree with them more.

However, I fear some market timers will see those returns in a vacuum and think that gives them license or perhaps even the duty to call another crash simply to chase these kind of outsized returns.

And lines like “Timing the recession correctly always outperforms buy-and-hold” might be true, but don’t sit well with me since that could come across as an endorsement of market timing taken out of context, even if McBride stresses repeatedly that he is not offering investment advice.

Anyway, I have to urge investors against market timing even if these charts are compelling. Because what this table fails to show in equally compelling detail is the risk of pulling your cash out of the market early and missing a big leg up.

Allow me to do that with a 10-year chart of the S&P 500. This shows 80% returns (That’s 8% annually on average) and doesn’t even include dividends. Not bad — and without timing the market with bigger trading fees or missing out on periods of growth.

McBride admits that “Calling recessions is a mug’s game, but I like to play.” That’s fine for him as a market expert … but shouldn’t mean that timing the market is right for you as an individual investor.

At a Glance

It's tempting to go "all in" or "all out" of the market based on the signs you see. However, timing the stock market is very difficult and an incorrect call can do a lot of harm. Most individual investors are much better off letting it ride rather than churning their portfolio, paying high fees and often making bad calls because they were out when they should have been in.